As we come up on the one-month anniversary of MGM v. Grokster, I've collected my thoughts for about why the decision is bad news for innovators and what Congress should do about it. I've reproduced it below. See also EFF's "Interpreting Grokster" one-pager submitted to the Congressional Internet Caucus, and audio from the subsequent panel discussion in which I participated. Update (August 1): You might also be interested in EFF and P2P United's joint testimony presented at the Senate Commerce Committee's post-Grokster hearing.

Remedying Grokster

Don't you hate it when you ask someone a question and, rather than answering it, they choose to answer a different one? Then you understand the frustration that technology lawyers feel in the wake of the Supreme Court's opinion in Metro-Goldwyn-Mayer, Inc. v. Grokster Ltd. The question asked by the parties and dozens of amici was direct and critically important: when will a technology vendor be held liable for the copyright infringements committed by third parties with its products? Asked to clarify the reach of copyright law's existing secondary liability doctrines, however, the Court instead announced a new doctrine for copyright: inducement.

The Court's ruling leaves technology companies and their attorneys to pick their way through a dangerous minefield of legal uncertainties. The trouble is not principally with the new doctrine of inducement announced by the Court: "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties." Rather, the trouble is the continued uncertainty surrounding the traditional copyright doctrines of contributory infringement and vicarious liability. In other words, it's not so much what the Court said, as what it didn't say, that ought to worry innovators and their attorneys.

[more after the jump]

Why Copyright is Different

Why is legal uncertainty in this context particularly chilling to innovators? First, and most important, is copyright's statutory damages regime. Unlike nearly every other area of law, copyright allows plaintiffs to skip proving actual damages and instead collect statutory damages, which a court may set between $750 and $30,000 per work infringed. So when secondary copyright claims are made against mass market products like the iPod, CD burners or file-sharing software, all of which are regularly used by customers to make copies of millions of works, statutory damages become a corporate death penalty. Insurance is unavailable for risks of this size and a claim against one product can sink an entire company. In contrast, patent law has no similar provision, nor do most other countries around the world.

And it gets worse. Not only can a copyright claim sink the company, but also it can imperil the personal assets of the individuals involved with the company. The corporate veil -- which generally shields the private assets of corporate officers, directors and investors from liabilities incurred by the corporation -- is a bedrock principle of American business. In copyright cases, however, the veil is routinely pushed aside. Copyright owners can and often do bring secondary liability claims directly against officers, directors and investors, alleging that each personally contributed to, or should be held vicariously liable for, the acts of the corporations they control. The music industry, for example, is continuing to press secondary copyright infringement claims against the officers, directors and principal investors behind Napster, long after the company's liquidation.

What the Court Didn?t Say

In light of these two harsh realities, the Supreme Court's failure to address the uncertainties in copyright's traditional secondary liability doctrines -- contributory infringement and vicarious liability -- is particularly troubling.

Contributory infringement arises when a defendant knows about infringing activity and materially contributes to it. When two motion picture studios sued Sony in 1976 for selling the first Betamax VCR, they did so under this theory. In that case, Sony Corp. of America v. Universal Studios Inc., 464 U.S. 417 (1984), the Supreme Court announced the "Betamax defense," holding that a technology vendor could not be held liable for distributing a technology "capable of substantial noninfringing uses." Because the Betamax VCR was plainly capable of noninfringing uses, Sony was off the hook.

Since the Court's Sony ruling, the technology and entertainment industries have bickered about the scope of the Betamax defense. Technologists see a bright-line rule: so long as a technology is merely capable of noninfringing uses, it is legal to sell, notwithstanding how some, or even most, customers may actually use it. Hollywood and the music industry, in contrast, read the case more narrowly, reasoning that Sony was only excused because the principal use of the Betamax was noninfringing.

The proper scope of the Betamax defense was the "main event" in the briefs filed by the parties and amici in Grokster. In its unanimous opinion, however, the Court refused to resolve the issue definitively. Nevertheless, the two concurring opinions make it clear how much was left unresolved.

Justice Stephen Breyer, joined by Justices Sandra Day O'Connor and John Paul Stevens, adopted and endorsed the views expressed by many of the technology sector amici, declaring that "Sony's rule is strongly technology protecting ... Sony thereby recognizes that the copyright laws are not intended to discourage or to control the emergence of new technologies, including (perhaps especially) those that help disseminate information and ideas more broadly or more efficiently." In contrast, Justice Ruth Bader Ginsburg's concurrence, joined by Chief Justice William Rehnquist and Justice Anthony Kennedy, rejected the bright-line interpretation. Unmoved by the argument that Sony bars contributory infringement unless a technology is almost exclusively used for infringement, Ginsburg declared, "Sony, as I read it, contains no clear, near-exclusivity test."

The inconclusive debates in the concurring opinions leave innovators and lower courts with precious little guidance. Assume that a technology company steers entirely clear of any inducement of infringement, as well-advised companies certainly will. How will courts react when copyright owners buttress their contributory infringement claims by commissioning experts to opine that the technology in question is primarily used for infringing purposes? If you happen to distribute technologies that are widely used for infringing purposes, like CD or DVD burners, a great deal may hang on this question.

The Court was even stingier with guidance on vicarious liability, copyright's other secondary liability doctrine. The Court recited the traditional formulation: "a vicarious liability theory ... allows imposition of liability when the defendant profits directly from the infringement and has a right and ability to supervise the direct infringer." But, having disposed of Grokster on inducement grounds, the Court declined to address the vicarious liability theory.

The lower courts in Grokster, responding to the diametrically opposing views of the parties, addressed vicarious liability in some detail. The entertainment industry had argued that the ability to redesign a product to reduce infringing uses ought to be deemed equivalent to a "right and ability to supervise" the customers who use the technology. The P2P defendants replied that such a "could have designed it differently" test would effectively force technology companies to redesign their products to suit the demands of copyright owners. On this point, the Solicitor General's amicus brief before the Supreme Court sided with the defendants: "The 'right and ability to supervise' element of vicarious liability ... has never, to our knowledge, been held to be satisfied by the mere fact that the defendant could restructure its relations or its product to obtain such an ability."

So what is the law? The Supreme Court ducked the question, leaving innovators and lower courts to sort the matter out in future cases.

A Remedy in Remedies?

The uncertainties surrounding copyright's secondary liability doctrines pose unique risks for innovators. These risks, in turn, chill innovation and investment in new multipurpose technologies with noninfringing uses, to the detriment of consumers, the economy and ultimately copyright owners themselves.

If the Supreme Court is unwilling to address the scope of secondary liability, perhaps it is time for Congress to address copyright remedies. As discussed, much of the copyright chill felt by innovators and technology investors can be traced to the prospect of apocalyptic statutory damages that can reach beyond the corporate grave into the personal assets of officers, directors and investors.

The extraordinary remedy of statutory damages should intimidate commercial pirates engaged in direct infringement, not technology innovators developing multipurpose devices. Congress should abolish statutory damages for secondary copyright claims. This would leave copyright owners injunctive remedies and actual damages, putting them in no worse a position than litigants in most other areas of civil law. Technology companies and investors, meanwhile, would be able to make reasonable business decisions about manageable levels of legal risk, rather than face the prospect of a corporate death penalty at the hands of unpredictable legal standards.

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